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IRS Tax Change Will Impact Warehouse Owners

Starting this tax year, a major change to the Internal Revenue Service code will impact how owners of business property assets, including warehouses and distribution centers, can deduct expenses for work done on their facilities.

In some cases it will require them to amortize the payment over time instead of getting the entire tax benefit in the year the work was done, while in other instances they can claim the entire deduction immediately.

“Typically (the change) can cause a 5%-10% swing in how companies expense their capital assets in a single year,” said Dean Sonderegger, senior product management executive for the software segment of Bloomberg BNA, a unit of Bloomberg L.P. that provides legal, tax, regulatory, and business information. “For capital-intensive businesses, such as a retailer with lots of DCs, it could have a significant impact on your tax rate. So you need to talk to your accountant as well as any technology provider that tracks expenses for tax purposes.”

Historically there has not been any clear guidance from the IRS as to what business property owners could do in relation to repairs to their fixed assets. As a result some companies capitalized them, recognizing the expense over the useful life of the asset – anywhere from 7 to 39 years – while others claimed it all in a single year.

“The case law on this has gone back and forth, which is why the IRS wanted to clarify it,” Sonderegger said. “They’ve been working on it for the past eight years in order to provide specific guidance on what repairs can be recognized (and expensed) right away and which ones have to be capitalized over time.”

There are two “safe harbor” exemptions to the rule that allow business property owners to recognize the expense in a single year, Sonderegger said. One is on repair or maintenance work that is $5,000 or less, and the other involves routine scheduled maintenance which can be documented.

In both cases, he said, business owners need to track all records of expenses and maintenance to show that it was done as part of a regular schedule, or that it cost under $5,000. “You need to track your rationale so you can prove it if audited,” he said. “So there is an administrative burden associated with compliance.”

To illustrate how the new code works, Sonderegger gave an example of a retailer whose distribution center has its roof, valued at $100,000, destroyed in a hailstorm. Under the old rule, the value of the roof would be capitalized over the remainder of its useful life. But under the new rule, the $100,000 loss can be recognized and deducted in the year the damage occurs.